Sunday, February 25, 2018

"Russia Gets Back to Investment Grade Rating"

A major piece from BNE Intellinews:

International
ratings agency Standard & Poor’s (S&P) upgraded Russia’s
sovereign rating to 'BBB-' from 'BB+' with a stable outlook on February
24, returning Russia to the sought after “investment grade” rating
category on the back of the end of a two-year long recession and several
pleasant surprises that suggest the economy is growing faster than
expected.

Among the good signs were Russia's solid fiscal performance, real
progress in cleaning up the banking sector, surprisingly strong
industrial production numbers, another set of strong PMI index results
and an unexpected pick up in corporate borrowing. The official forecasts
for growth and the federal budget deficit this year is a modest 1.5%
and a painful -3.4% GDP respectively, but both those estimates are
already looking way too pessimistic; many analysts are predicting at
least 2.5% growth in 2018 and even Minister of Economy Maxim Oreshkin
said during the Gaidar Forum in Moscow in January there is a good chance
the federal budget will be in surplus by December.

“The upgrade reflects the track record of prudent policy responses
that as allowed the Russian economy to adjust to lower commodity prices
and international sanctions. [The government] demonstrated commitment to
fiscal restraint and an enhanced fiscal policy framework have reduced
medium-term risks of fiscal slippage. Finally, despite the ongoing
clean-up of the banking system, the Central Bank of Russia (CBR)
measures have preserved fiscal stability. Credit to the private sector
has started to recover, which we view as a sign of improved monetary
transmission,” the ratings agency said in a press release.

Investment grade opens doors to new money

Market players expect demand for Russian state bonds to increase as
major international funds require two investment grades as a minimum to
invest in a country’s financial instruments.

The investment grade status opens Russia up to a new class of
investor like US pension funds that are not allowed to invest in junk
graded assets. It will also cause an inflow of passive money by index
tracking funds that also require investment grade sovereign ratings.
However, both these inflows will be muted by the US sanctions on Russia.

Oreshkin welcomed the news, saying: “This opens a path for increased
investment lending and expands the possibility of financing the
infrastructure debt.” Oreshkin added that the floating exchange rate and
careful targeting of inflation “significantly reduced the dependence of
the Russian economy on oil prices."

The rerating of Russia represents a catch up with the government’s
success in deal with the imposition of international sanctions in 2014
when Russia’s rating was cut to junk status.
Initially investors worried that Russia would not be able to meet its
debt obligations – worries that only got worse when Russia was hit by
the double whammy of the collapse of oil prices the same year. However,
Fitch noted that the general government debt has since fallen to
15.5%,of GDP in 2017, one of the lowest in the BBB category, and that
the government can easily meet these debts from the improving tax
collections.

Recession over

The crisis is finally over and two years of economic contraction –
the first backwards movement since president Vladimir Putin took office
in 2000 – finally ended in 2017 as Russia’s economy returned to growth.

Preliminary figures from Rosstat show that Russia’s economy turned
the corner in 2017 and GDP grew by 1.5%, which was slightly less than
nearly all forecasters had expected thanks to a “technical recession” in
the last part of 2017. Russia is recovering but the recovery remains
fragile.

Now the pace already seems to be picking up. One of the pleasant
surprises already in was a better than expected performance in
industrial production, which expanded by a strong 2.8% in January y/y
after contracting in both November and December, Rosstat said on
February 16.

This backs up the PMI index results
that measures activity in the productive parts of the economy. Business
activity growth across the Russian service sector remained strong in
January, despite the pace of expansion easing to a three-month low,
according to a report by IHS Markit published on February 5. The IHS
Markit Russia Services Business Activity Index stood at 55.1 in January,
down from 56.8 in December, but still remaining above the no-change
mark of 50.0 and indicating "a strong expansion in output among Russian
service providers".

"The Russian service sector indicated a solid start to 2018, with
strong expansions in output and new business," Markit economist Sian
Jones commented., adding that anecdotal evidence of the survey links
improved business activity to more favourable economic conditions and
greater new order volumes...MUCH MORE.